If you’re just starting your business and you’re interested in creating a cash flow forecast, your interest is well-timed. Try to remember that the cash flow statement is driven by two things: organization and planning. So, get organized and plan!
Make a list of all the one-time start-up expenses that you have paid or expect to pay. Begin by looking at the cash you have in hand, this could be money you’ve invested in the business, cash in the business bank account, loans that you’ve received, or an investment from a partner.
Think incorporation fees, legal and accounting, software licenses, UX/UI design, website, rental, marketing materials and advertising, initial supplies, office supplies, furniture, equipment, etc.
Next you want to determine your monthly expected cash sources. These can be projected sales, loans that you know are coming in at a certain date, investments from partners or investments. If you’re a new business you might want to project sales conservatively (better to outperform and have a better inflow of cash than you thought). If you’ve already started your business or are purchasing a business from someone else, you have a distinct advantage: sales history. History can’t predict the future, but it can paint a decent picture of what the future looks like and what business changes you might need to make.
Finally, you will need to assess your monthly expenses. This can be a bit tricky because it’s easy to overlook things and get a surprise you really don’t want. Monthly expenses to factor in can include rent or mortgage, insurance, advertising, marketing, website hosting, travel, utilities, payroll, inventory, taxes, loan payments, working capital, and last but not least paying yourself!
The most important thing about this process is being honest and objective. Do your homework and get accurate estimates of costs. If costs look high, simply projecting more sales when you don’t have the capacity to close those sales won’t fill that proverbial water tank. So perhaps you tighten the outflow. What can you reduce or cut? For example, if you need a creative studio, maybe you rent that 500 square foot space instead of the open, airy 1,000 square foot one.
Trying to secure external sources of funds?
Here are some key terms often used when analyzing your cash flow:
•Break-even: The level of sales required to produce operating results with zero profit (sales revenue less cost of sales and other expenses equals zero).
•Burn rate: The rate at which cash is burned or consumed by a business that is operating at a loss
•Sources of funds: Who is investing into the business and in what structure? This refers to ownership structures are a very sensitive and important issue with third-party financing sources.
•Stretch: If you’re forecasting cash to run out in four months but a new source of cash won’t be available for six months, you must find a way to stretch your cash to reach the next funding date.
Remember, you will be able to use the cash flow statement not only to analyze your sources and uses of cash from year to year but also from month to month if you set up your accounting system correctly. You will find the cash flow forecast to be an invaluable tool in understanding the how’s and whys of cash flowing into and out of your business. If you found this general article helpful please check out our guide on Managing Cashflow for Tech Startups.